Market Commentary for the week of August 13, 2007

Something’s obviously not quite right.

As the market weakens, it begins to expose the ugly underbelly of exactly how all those “new highs” were achieved. And despite the fact that smoke and mirrors work well enough, those rallies were executed with debt and leverage. The pullback has gotten everyone’s attention.

However, revealing the ugly secret of credit-driven-rallies is not altogether a bad thing. I have written extensively this year about the misallocation of priorities, and how phantom earnings are not really earnings, at all.

Let’s bring this to a human level.

The terrible bridge collapse tragedy in Minnesota, for example, is not only a human event. Its consequences resound loudly throughout politics, economics, and sociology. Why, for example, are there such deficiencies in our brick and mortar infrastructure? Resources are only part of the problem. Priorities are skewed when we have a generation of dot.com theorists who believe, nay worship, that the power of technology trumps the well being of social institutions or the values of social studies.

I believe the same type of decay and collapse is happening in medicine and other institutions, for example, but the warning signs are going unheeded.

Forgive the editorial, but…

My missives are certainly not political polemics, but it does strike me as odd when “technology” and “efficiency” are verbal surrogates for morality and civility. Billions of dollars that might be used for one purpose are substituted for another. Those decisions affect my ability to quantify investment opportunity and sector allocation. Frequently, because quantitative methodology is reactive to events not predictive, I must throw up my hands and go with “what’s there” on paper, rather than what should be there.

This matters because patterns are redundant. Free money caused this predicament and is part of the problem globally as well as within the U.S.

As the fantasy of leveraged growth unwinds, we will be forced to deal with the consequences of the massacre, and the decisions that follow about restructuring economic priorities. Ultimately, as the lenders dry up, so too will the hyperbole.

Methodology and discipline matter.

It is also important to realize that trends, no matter in which direction, take time to manifest. Who knew that a majority of investors might get burned again within one decade after the last bear folly? Sometimes, in the middle of a trend evolving we can’t see it. I hope that we aren’t chiding ourselves in the future for the same fantasy-chase that took down our expectations once before.

Politically, our institutions need to address the allocation of resources and tax strategies and incentives. In order to achieve successful economic modeling, we need good political science. One must first be a citizen of the globe, before making decisions about asset allocation, investing, greed, and the need for profits.

Living on the edge is fine, as long as we contain the risk to ourselves.